I have shifted to Forbes.http://blogs.forbes.com/peterjreilly/
This site is an archive of my pre-July 2011 posts and a repository of original source material that I referenced from Forbes.

Monday, October 25, 2010

FLP Good for the Family Business - But Maybe not the Family Jewels

JOHN W. FISHER and JANICE B. FISHER, Plaintiffs, v. UNITED STATES OF AMERICA, Defendant.09/01/2010

The family limited partnership is a fairly robust estate planning tool. It has been under attack for some time, but generally stands up pretty well. The IRS objection to it is understandable. Somehow it seems that taking a bunch of stuff and putting the stuff into an entity should not produce a whole that is of lesser value than the sum of its parts. It makes one wonder whether intellectual integrity is a key element in successful tax practice. On a really bad day it makes one wonder whether lack of intellectual integrity might be a requirement.

The Fishers formed a Limited Liability Company (LLC) called Good Harbor Partners LLC. Its principal asset was a tract of undeveloped land that bordered Lake Michigan. In 2000, 2001 and 2002, they gave 4.762% interests in the LLC to each of their children. The Good Harbor operating agreement has significant restrictions on the transferability of interests. The IRS argued that the restrictions on transferability should not be considered because the LLC did not constitute a bona fide business arrangement. The court agreed stating :

The facts of this case are analogous to those in Holman . There, two donors created a limited partnership, funded it with common stock from a publicly traded company, and gifted limited partnership shares to their children. 601 F.3d at 765. There was no evidence indicating that the partnership employed a particular investment strategy or that the donors were “skilled or savvy investment managers whose expertise [wa]s needed or whose investment philosophy need[ed] to be conserved or protected from interference.” Id. at 770, 771. The donors retained exclusive control of the partnership, and their children could not withdraw from the partnership or assign their interests unless certain transfer conditions were met. Id. at 766. The Eighth Circuit affirmed the Tax Court's conclusion that the restrictions upon the children did not serve a bona fide business purpose because the partnership was not a ““business,” active or otherwise.” Id. at 770. In so holding, the Holman court distinguished a line of cases where active, ongoing business interests were preserved by the transfer restrictions at issue.See, e.g., id. at 771 (“The underlying assett in [Estate of] Bischoff [v. Comm'r, 69 T.C. 32, 39–40, 1977 WL 3667 (1977)] was a pork processing business organized, controlled, and managed by three families who sought to assure their continuing ability to carry on their pork processing business without outside interference, including that of a dissident limited partner.”).

This case is troubling in that there doesn't appear to be any of the sloppy execution that is common in failed family limited partnership. It appears to call into question the use of this technique in the case of a single asset that does not have business characteristics.

Search This Blog

Pages

Over and over again courts have said that there is nothing sinister in so arranging one's affairs as to keep taxes as low as possible. Everybody does so, rich or poor; and all do right, for nobody owes any public duty to pay more than the law demands: taxes are enforced exactions, not voluntary contributions. To demand more in the name of morals is mere cant. Judge Learned Hand

Warning

Any tax advice contained in this communication is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein.